Kenneth Cesta

Ninth Circuit Affirms District Order Refusing to Compel Arbitration

March 22, 2023 by Kenneth Cesta

In City of Laurel, Mississippi v. Cintas Corp. No. 2, the Ninth Circuit Court of Appeals addressed the issue whether a valid arbitration agreement existed between the plaintiff City of Laurel, Mississippi, and defendant Cintas Corporation No. 2. The court affirmed the district court’s order denying Cintas’ motion to stay proceedings and compel arbitration, concluding that “there is no valid arbitration agreement between Cintas and the City.”

The case involved two contracts. The first contract, referred to as the “master agreement,” was between Cintas and “the lead public agency” and included an arbitration clause. The second contract was between Cintas and the city, and included provisions establishing how Cintas would deal with the city and other “participating public agencies.” The parties did not dispute that there was a valid arbitration agreement between Cintas and the “lead public agency” as stated in the first contract. Rather, the dispute focused on whether “the same [arbitration] agreement exists between Cintas and the City.”

The city brought breach of contract claims against Cintas, and the district court denied Cintas’ motion to stay the action and compel arbitration. In affirming the district court’s decision, the Ninth Circuit first noted that under the FAA, “the court is limited to determining (1) whether a valid agreement to arbitrate exists, and, if it does, (2) whether the agreement encompasses the dispute at issue.” The court found the contract between Cintas and the city did not include an arbitration clause, and instead provided that Cintas and the city would resolve disputes “directly between them in accordance with and governed by the laws of the State in which [the City] exits.” The court found that if this language compelled arbitration, “it would be superfluous in light of the arbitration agreement incorporated into the Master Agreement,” noting that courts “must avoid interpreting a contract in a way that would render provisions ‘redundant and superfluous.’” The court also rejected Cintas’ argument that the court should “harmonize” the two contracts by applying the arbitration agreement contained in the contract between Cintas and the lead public agency, citing Morgan v. Sundance Inc., which stated that “a court may not devise novel rules to favor arbitration over litigation.”

In a dissenting opinion, one of the circuit judges concluded that the underlying agreement between the parties compels arbitration of the dispute, and he would reverse the judgment of the district court and remand the case with instructions to compel arbitration.

City of Laurel, Mississippi v. Cintas Corp. No. 2, No. 22-15476 (9th Cir. Mar. 6, 2023).

SDNY Rejects Cross-Petition To Vacate Arbitration Award, Rejecting Claims of Manifest Disregard of Law and “Evident Partiality”

March 3, 2023 by Kenneth Cesta

Recognizing arbitration awards are subject to “very limited review” and should be confirmed, “so long as there is a ‘barely colorable justification’ for the outcome that the arbitrator reached,” the U.S. District Court for the Southern District of New York affirmed the arbitration award in favor of the petitioners, Telecom Business Solution, LLC, LATAM Towers, LLC, and AMLQ Holdings (Cay) Ltd., and denied the respondents, Terra Towers Corp., TBS Management, S.A., and DT Holdings, Inc.’s cross-petition to vacate that award.

The petitioners and respondent, Terra Towers Corp., entered into a shareholders agreement to co-own and operate a business engaged in the operation of telecommunications towers in Central and South America (Company). Terra was the majority shareholder of the Company, and the petitioners were the minority shareholders. The shareholders agreement provided that after five years, the petitioners could unilaterally initiate a sale of the Company, which it did two weeks after the expiration of the five-year period. Terra rejected the sale proposed by the petitioners and sought to buy out the petitioners’ shares of stock in the Company. The petitioners then commenced an arbitration alleging that Terra breached the shareholders agreement “by obstructing their proposed sale of the Company.” The petitioners sought damages from the respondents or specific performance. The petitioners and respondents each appointed one arbitrator who then appointed a third arbitrator to act as chair of the panel. Phase one of the arbitration was limited to the petitioners’ claim for specific performance related to the sale of the Company. After a hearing, the panel issued a First Partial Final Award (FPFA) ordering a sale of the Company. Further disputes developed between the parties after the entry of the FPFA, resulting in the entry by the panel of interim relief, including an injunction. The respondents claimed to the ICDR that there was “‘justifiable doubt’ about their party-appointed arbitrator’s impartiality.” After further submissions on the issue, the ICDR’s International Administrative Review Council denied the respondents’ challenge.

The petitioners filed a petition to confirm the FPFA, and the respondents sought “to vacate the FPFA, asserting that the panel violated “‘fundamental fairness’ by refusing to provide them with ‘a fair opportunity to be heard’ … that the Panel acted in ‘manifest disregard of the law’ … by granting specific performance to Petitioners,” and that there was “evident partiality” by two of the three arbitrators in favor of the petitioners. After noting the grounds on which an arbitration award may be set aside, the court rejected all of the respondents’ arguments and granted the petition to confirm the FPFA. The court found “[n]either the Panel’s decision to phase the arbitration nor the Panel’s denial of discovery in Phase 1 of the Arbitration constituted misconduct that rendered the Arbitration fundamentally unfair.” The court also rejected the respondents’ contention that the FPFA issued was in “manifest disregard of the law,” finding a court’s review under this standard is “severely limited” and a “doctrine of last resort” limited to “rare instances where some egregious impropriety on the part of the arbitrators is apparent.” Finally, the court rejected the respondents’ claim of evident partiality concluding the “ICDR already has carefully reviewed and rejected all of Respondents’ evidence of a purported disqualifying conflict.”

Telecom Business Solution, LLC et al. v. Terra Towers Corp., et al., No. 22-cv-1761 (SDNY, Jan. 18, 2023)

Wyoming Supreme Court Affirms Finding That Arbitrator’s Determinations Did Not Exceed Authority And Were Not Manifest Errors of Law

March 1, 2023 by Kenneth Cesta

Defendant Fork Road, LLC, is the owner of a floor of an office building, which it purchased several years earlier. Plaintiff Mountain Business Center, LLC (MBC) was a tenant in the building at the time of Fork Road’s purchase. In connection with the purchase, MBC was to provide an estoppel certificate listing, and among other things, subtenant identities and sublease rent payment information. MBC returned the estoppel certificate, but did not provide the requested information concerning the subtenants and sublease rental payments. Fork Road proceeded with the purchase without this information, gave notice to MBC to vacate the premises, and notified the subtenants that Fork Road would be taking over the subleases. MBC refused to vacate and Fork Road filed an eviction action in the Wyoming circuit court. MBC appealed to the district court, which ruled the parties were bound by an arbitration clause in their agreement.

The dispute proceeded to arbitration. MBC and Fork Road submitted a “Stipulated List of Issues to be Determined by the Arbitrator,” which the arbitrator then consolidated and summarized. The result was seven claims by Fork Road and eight claims by MBC, largely related to various alleged breaches of the underlying lease agreement. After a five-day hearing, the arbitrator issued a 47 page decision in which he decided all issues presented, and ruled “for and against both MBC and Fork Road” on their various claims. The arbitrator determined that MBC sustained damages of $35,750, and that Fork Road sustained damages of $11,752. Fork Road was permitted to offset MBC’s damages with the damages it had incurred, and in so doing, the arbitrator rejected MBC’s argument that the “first-to-breach rule” prevented the off-set. The arbitrator also decided MBC was not the prevailing party and not entitled to attorney’s fees. MBC appealed to the district court, which confirmed the award.

MBC then appealed to the Wyoming Supreme Court. First, MBC alleged the arbitrator exceeded his authority “by making factual and legal determination of issues not submitted to him.” The court disagreed, concluding that the arbitrator “properly relied on the stipulated list to determine the issues before him….” Second, the court also rejected MBC’s arguments that it was manifest error of law when the arbitrator determined (1) MBC was not the prevailing party and therefore not entitled to attorney’s fees; and (2) MBC was not entitled to the benefit of the “first-to-breach rule.” The court affirmed the district court’s order, concluding “the arbitrator did not exceed his authority in determining the issues presented to him…” and “did not commit manifest error in its prevailing party and first-to-breach rule analysis.”

Mountain Business Center, LLC v. Fork Road, LLC, Docket No. S-22-0090 (Supreme Court of Wyoming, Nov. 23, 2022)

First Circuit Affirms Order Compelling Arbitration and Rejecting Claim By Postmates Couriers of Exemption From the FAA

February 10, 2023 by Kenneth Cesta

In Damon Immediato, et al., v. Postmates, Inc., the First Circuit addressed the issue of whether couriers who deliver goods from local restaurants and grocery stores are “transportation workers engaged in interstate commerce such that they are exempt from the Federal Arbitration Act.” The court affirmed the district’s court’s decision granting defendant’s motion to compel arbitration and concluding that the plaintiffs were not exempt from the FAA.

The defendant, Postmates, operates an online platform that allows customers to order local takeout and certain products from local grocery stores. Plaintiffs are couriers for Postmates who made deliveries to customers in the Boston area. When plaintiffs registered as couriers, they were required to accept Postmates “Fleet Agreement” which, among other things, classifies the couriers as independent contractors and includes a mutual arbitration provision governed by the FAA. The arbitration provision requires all disputes be resolved through final and binding arbitration under AAA Rules, but allows a courier to opt-out of the arbitration provision within 30 days of accepting the Fleet Agreement. Plaintiffs did not opt out of the arbitration provision.

Plaintiffs filed an action in Massachusetts state court on behalf of themselves and a putative class of couriers, alleging Postmates misclassified them as independent contractors and, as employees, they were entitled to benefits such as reimbursement of business expenses, the payment of a minimum wage, and paid sick leave. Postmates removed the action to federal court and moved to compel arbitration. Plaintiffs opposed the motion contending they were exempt from the FAA under 9 U.S.C. §1. The district court determined the exemption did not apply, granted Postmates’ motion to compel arbitration, and stayed the federal action pending the outcome of the arbitration. Plaintiffs accepted individual offers of judgment in the arbitration and the district court dismissed the case.

On appeal, the plaintiffs argued they “belong to a class of workers encompassed by the residual clause of section 1 and are therefore outside the grasp of the FAA.” Section 1 of the FAA provides, in part, “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” The court noted, however, that the Supreme Court “has interpreted the residual clause of this exemption to apply only to ‘transportation workers,’ meaning workers who play a ‘necessary role’ in the interstate transport of goods.” [Citation omitted]. The court rejected plaintiffs’ argument, concluding “couriers who deliver meals and goods as the result of local purchases from local vendors are not within a class of workers ‘engaged in foreign or interstate commerce’ who are exempt from the FAA under section 1.” Plaintiffs also contended on appeal if they are not exempt from the FAA under section 1, then their contracts with Postmates must be outside the coverage of section 2 of the FAA, “which extends the FAA’s reach to all contracts ‘involving’ interstate commerce. 9 U.S.C. §1, 2.” The court rejected this argument as well, concluding “appellants’ employment contracts are covered under section 2 of the Act because couriers who make local retail deliveries affect interstate commerce, but those contracts are not exempt under section 1 because the appellants are not part of a class of workers actively engaged in the interstate transport of goods. The district court was therefore required to compel arbitration according to the terms agreed to by the parties.”

Damon Immediato, et al, v. Postmates, Inc., No. 22-1015 (1^st Cir. Nov. 29, 2022)

Second Circuit Rejects Application of the Functus Officio Doctrine and Affirms District Court’s Order Denying Petition To Vacate Arbitration Award and Granting Cross-Petition to Confirm Award

February 8, 2023 by Kenneth Cesta

In Smarter Tools, Inc., v. Chongqing Seni Import & Export Trade Co., Ltd., et al., the Second Circuit affirmed the district court’s order denying Smarter Tools, Inc.’s (STI) petition to vacate an arbitration award and granting Chongqing Seni Import & Export Trade Co. Inc. and Chongqing AM Pride Power and Machinery Co., Ltd.’s (collectively, SENCI) cross-petition to confirm the award.

STI is engaged in the business of buying and selling tools and power products. SENCI produces and sells gas-powered generators. STI and SENCI entered into contracts for STI’s purchase of thousands of generators from SENCI. The purchase orders for the generators included an arbitration provision “providing that any dispute arising from the contracts would be resolved by arbitration, to be conducted in New York City under the International Commercial Dispute Resolution Procedure of the American Arbitration Association.” After disputes arose between the parties regarding the generators, SENCI initiated arbitration to collect amounts due from STI. STI filed a counterclaim contending that several of the generators were defective and failed to comply with applicable state and federal regulations, resulting in damages to STI. The parties agreed the arbitrator should provide a reasoned award. After the hearing, the arbitrator rendered an award, which (i) included a brief description of the proceedings, (ii) excluded the testimony of STI’s expert witness and five exhibits related to that testimony, and (iii) included two findings. The arbitrator awarded SENCI approximately $2.4 million and denied all of STI’s claims against SENCI.

STI filed a petition to vacate the arbitration award contending it was not a “reasoned award” as required, and that the arbitrator “manifestly disregarded the law.” SENCI filed a cross-petition to confirm the award. The district court found the arbitrator’s award did “‘not meet the standard for a reasoned award because it contains no rationale for rejecting STI’s claims’” and “‘the arbitrator exceeded his authority in issuing an award that does not meet the standard of a reasoned opinion.’” The district court remanded the matter to the arbitrator for clarification of his findings. The arbitrator then issued a final amended award providing the same relief for the parties, but also including a further explanation of why STI’s counterclaims failed. STI again moved to vacate the amended award, and SENCI moved to confirm the award. The district court found the arbitrator’s amended award provided sufficient details to constitute a reasoned award and granted SENCI’s cross-petition to confirm the award and denied STI’s petition to vacate.

In affirming the district court’s order, the Second Circuit first noted the opinion in Porzio v. Dresdner, Kleinwort, Benso, N. Am., LLC, 497 F.3d 133 (2d Cir. 2007) confirming the “extremely deferential standard of review” that should be applied in reviewing arbitral awards “[t]o encourage and support the use of arbitration by consenting parties.” The court noted “‘[o]nly a barely colorable justification for the outcome reached by the arbitrators is necessary to confirm the award.’” The court then rejected STI’s argument that the doctrine of functus officio barred the district court from remanding the matter to an arbitrator for a reasoned award. The doctrine of functus officio provides “once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority over those questions is ended, and the arbitrators have no further authority, absent agreement by the parities, to redetermine those issues”. The court found “where, as here, a district court determines that the arbitrator failed to produce an award in the form agreed to by the parties, remand for a properly conformed order is a permissible choice. It simply makes no sense to redo an entire arbitration proceeding over an error in the form of the award issued after the hearing.”

The court also rejected STI’s argument that vacatur was mandated under the FAA. The court held that “applying the strong presumption in favor of enforcing an arbitration award, the arbitrator’s failure to render a reasoned award does not fall within a narrow reading of Section 10(a)(4) and did not require vacatur of the original award.” The court found “where, as here, the parties agree that the arbitrator will produce a reasoned award, the failure to provide one renders the award ‘imperfect in matter of form not affecting the merits of the controversy.’ 9 U.S.C. §11(c).” Finally, the court rejected STI’s claim that the district court also erred in not finding the arbitrator acted in “manifest disregard of the law” finding those claims groundless.

Smarter Tools, Inc., v. Chongqing Seni Import & Export Trade Co., Inc., et al., No. 21-724 (2d Cir. Jan. 17, 2023)